Spectres of October crashes past

Keats called it the ‘season of mists and mellow fruitfulness’, but for the markets Autumn/Fall – and October in particular – can be a turbulent time.  There were the crashes of 2008 and 1987 of course, when the market sold off by 16.9% and 21.8% respectively[1].  And while an efficient market like the S&P shouldn’t be seasonal, it clearly is: the average S&P monthly growth rate in October is just 0.5%, 7 basis points below the monthly average growth rate of the S&P since 1928.

Don’t ask me why this happens – statistical regularities like this ought not to occur in an efficient stock market.  Maybe it’s just the onset of the Autumn blues (in the northern hemisphere at least).  Certainly, the markets appear jittery at the moment, with a month-to-date fall in the S&P of 5% (in dollar terms) in the first 19 days of October (-5.5% for MSCI World) and the Vix up over 19 (down from its peak on the 11th at 24.98).  More fundamentally, some are focused on the prospects for US inflation, interest rates and bond yields, with a significant minority fearful that the Federal Reserve is about to make a policy error – allowing inflation to surprise upwards and having to scramble to contain it during 2019.  For others, the Fed is moving too far, too fast irrespective of what happens to inflation – especially against a background of rising bond yields, trade conflict, de-globalization and high oil prices. That concern seems to have been the main driver of this month’s sharp falls.

Let’s not make too much of this though.  There have been plenty of Octobers when the S&P has done well – 48 out of 90 where October growth has outpaced the 90-year monthly average since 1928.  And, September, February and May are worse months on average, statistically speaking.  More fundamentally, my sympathies lie with the Fed.  I think it’s far too early to call an inflation shock – the relationship between inflation and capacity has changed markedly since the financial crisis.  Inflation expectations seem well-anchored and the very concept of capacity seems up for question, even in the US labour market.  Moreover, should growth slow sharply – because of trade conflict, oil prices or anything else, the Fed will probably react by not raising rates at the pace currently indicated.

So maybe we should take a deep breath, channel our inner Keats and remember that other great poet and stock market predictor, T. S. Eliot too.  After all, October isn’t the cruellest month; April is.  Or, as they say in the markets, ‘sell in May and go away’ – until October.

[1] Source for all data: Bloomberg, as at 10 October 2018 unless otherwise noted.

Shamik Dhar, chief economist, BNY Mellon Investment Management

Keats called it the ‘season of mists and mellow fruitfulness’, but for the markets Autumn/Fall – and October in particular – can be a turbulent time.  There were the crashes of 2008 and 1987 of course, when the market sold off by 16.9% and 21.8% respectively[1].  And while an efficient market like the S&P shouldn’t be seasonal, it clearly is: … read more

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Exploding the debt reduction myth

Since the crisis US$60 trillion of debt has been created globally versus US$15 trillion of GDP. That is a ratio that is clearly concerning for central bankers though they rarely address it head on. Does the net worth of a central bank matter? It is not a question that they want  to answer. But when you look at the leverage ratio of central banks, their assets versus capital, we are in the territory of Lehman Brothers prior to its implosion in 2008.

The Federal Reserve is 78 times levered and the Bank of Japan 79 times. The European Central Bank is at 30 times. If you ask anyone if this matters  you will get a shrug. Of course, central banks cannot go bust in a traditional commercial sense, but that is not the real issue.

The problem is whether a financially weak central bank is able to conduct monetary policy in the way it wants to? A weak central  bank has to deal with that problem and also the issue of credibility and trust.

Abdallah Nauphal – Insight, a BNY Mellon company

Since the crisis US$60 trillion of debt has been created globally versus US$15 trillion of GDP. That is a ratio that is clearly concerning for central bankers though they rarely address it head on. Does the net worth of a central bank matter? It is not a question that they want  to answer. But when you look at the leverage … read more

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The week that was…

In the week ending 9th October, what stole the financial headlines?

The battle to slow the land gains of the Islamic State in Iraq and Syria continued. With ongoing air strikes from the West and its allies, Islamic fighters advanced apace as they seized a significant portion of the Syrian border town, Kobani. With the US ruling out a ground operation, both the German and UK governments put pressure on Turkey – which borders Kobani – to help the ailing Kurdish town. In the US, the release of the September minutes from the Federal Open Market Committee meeting showed members expressed concerns over the potential negative impact of weaker foreign growth on the US economy.

Headline Hotlist & World/ Asset Returns Source: The BNY Mellon Investment Strategy and Solutions Group (“ISSG”) as at 10/10/14. ISSG is part of The Bank of New York Mellon.

The battle to slow the land gains of the Islamic State in Iraq and Syria continued. With ongoing air strikes from the West and its allies, Islamic fighters advanced apace as they seized a significant portion of the Syrian border town, Kobani. With the US ruling out a ground operation, both the German and UK governments put pressure on Turkey … read more

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The week that was…

In the week ending 2nd October, what stole the financial headlines?

The battle between the West and Islamic State militants intensified. Backed by a number of Middle Eastern states, the US-led air campaign gained additional backing as both the Australian and Canadian governments pledged military support. Canada’s government has promised CF-18 fighter jets and refuelling and surveillance aircraft. Meanwhile, the anti-Islamic State movement gained further traction as Turkey, thus far reluctant to take a frontline role against the militants, signalled it may send troops into Syria or Iraq and let allies use its air bases. Elsewhere, positive US jobs data raised the possibility of an early interest rate hike by the US Federal Reserve. September’s job report showed the unemployment rate had fallen to 5.9%, its lowest level since August 2008.

Headline Hotlist & World/ Asset Returns Source: The BNY Mellon Investment Strategy and Solutions Group (“ISSG”) as at 03/10/14. ISSG is part of The Bank of New York Mellon.

The battle between the West and Islamic State militants intensified. Backed by a number of Middle Eastern states, the US-led air campaign gained additional backing as both the Australian and Canadian governments pledged military support. Canada’s government has promised CF-18 fighter jets and refuelling and surveillance aircraft. Meanwhile, the anti-Islamic State movement gained further traction as Turkey, thus far reluctant … read more

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The week that was…

In the week ending 18th September, what stole the financial headlines?

The Middle East and the battle against the Islamic State of Iraq and the Levant, also known as Isis, remained firmly in the spotlight as the West upped the ante with further air strikes and attempts to bolster regional support. Indeed, the French president, François Hollande reported that French military aircraft had carried out air strikes in Iraq – its first for 15 years. Meanwhile, the US House of Representatives approved President Barack Obama’s plans to train and arm moderate Syrian rebels. The US$500m funding proposal is aimed at squeezing Isis forces in Syria. However, question remain over whether the US is prepared to send ground troops to the region. While Obama has ruled this out, the US army chief of staff, General Ray Odierno was quoted last week as saying air strikes alone will not be enough to destroy Isis.

Headline Hotlist & World/ Asset Returns Source: The BNY Mellon Investment Strategy and Solutions Group (“ISSG”) as at 19/09/14. ISSG is part of The Bank of New York Mellon.

The Middle East and the battle against the Islamic State of Iraq and the Levant, also known as Isis, remained firmly in the spotlight as the West upped the ante with further air strikes and attempts to bolster regional support. Indeed, the French president, François Hollande reported that French military aircraft had carried out air strikes in Iraq – its … read more

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The week that was…

In the week ending 11th September, what stole the financial headlines?

With the conflict in Iraq and Syria showing little sign of abating, US President Barack Obama upped the ante with a prime-time televised address in which he outlined his strategy to “degrade and ultimately destroy” the Islamic of Iraq and the Levant, also known as Isis. As part of this strategy, the Obama administration moved to secure backing from various Arab leaders and European allies. Indeed, 10 Arab states, fronted by Saudi Arabia, announced they would join the fight against Isis, while Germany, France and the UK have also thrown their support behind the plans, although the full extent of the latter’s involvement remains unclear. Back at home, US lawmakers pledged broad support behind the president’s plans but fears of an open-ended conflict continue to weigh on the shoulders of the key decision makers. The White House has already requested around US$500m in funds to aid moderate Syrian rebels fighting Isis.

Headline Hotlist & World/ Asset Returns Source: The BNY Mellon Investment Strategy and Solutions Group (“ISSG”) as at 12/09/14. ISSG is part of The Bank of New York Mellon.

With the conflict in Iraq and Syria showing little sign of abating, US President Barack Obama upped the ante with a prime-time televised address in which he outlined his strategy to “degrade and ultimately destroy” the Islamic of Iraq and the Levant, also known as Isis. As part of this strategy, the Obama administration moved to secure backing from various … read more

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The week that was…

In the week ending 4th September, what stole the financial headlines?

Unrest for the West continued apace as troubles in Ukraine and Iraq showed little sign of abatement. With its interference the wrong side of the Ukrainian border still largely unchecked, Russia looks set to be the subject of further economic sanctions by the EU. Indeed, it is preparing to ban Russian state-owned oil companies from raising funds in European capital markets. Such action would hit some of the country’ s largest energy groups. Meanwhile, US President Barack Obama, in Europe for the Nato summit, was the subject of criticism for his failure to develop and implement a workable strategy with which to deal with Russia’s advances. To date, Obama has repeatedly stated his desire for a diplomatic solution. Elsewhere, US air strikes in Iraq continued in an attempt to blunt the Islamic State’s rapid progress through the country. Following the execution of US journalist Steven Sotloff, the second beheading in a matter of weeks, the US president told a news conference of the US’ desire to “degrade and destroy” Islamic State.

Headline Hotlist & World/ Asset Returns Source: The BNY Mellon Investment Strategy and Solutions Group (“ISSG”) as at 05/09/14. ISSG is part of The Bank of New York Mellon.

Unrest for the West continued apace as troubles in Ukraine and Iraq showed little sign of abatement. With its interference the wrong side of the Ukrainian border still largely unchecked, Russia looks set to be the subject of further economic sanctions by the EU. Indeed, it is preparing to ban Russian state-owned oil companies from raising funds in European capital … read more

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The week that was…

In the week ending 28th August, what stole the financial headlines?

The gold price rose as tensions between Ukraine and Russia showed little sign of easing. The Ukrainian president, Petro Poroshenko, says Russian troops have entered the country while Nato claims more than 1,000 Russian soldiers are operating in Ukraine. The crisis, which began in Crimea in late February, seems no closer to a conclusion. Meanwhile, the situation in Iraq remain fraught with the Islamic State controlling vast swathes of the country. US air strikes continued but so too did a reluctance from the West to send in ground troops to stabilise the situation. Elsewhere, there was a collective shrug of shoulders from market commentators as the S&P 500 passed 2,000 for the first time. Despite an upward revision to second quarter growth numbers – to 4.2% from 4.0% – doubts remain over the veracity of the US economic recovery. The lack of wage inflation, in particular, remains an area of concern with less than two months before the scheduled conclusion of quantitative easing.

Headline Hotlist & World/ Asset Returns Source: The BNY Mellon Investment Strategy and Solutions Group (“ISSG”) as at 29/08/14. ISSG is part of The Bank of New York Mellon.

The gold price rose as tensions between Ukraine and Russia showed little sign of easing. The Ukrainian president, Petro Poroshenko, says Russian troops have entered the country while Nato claims more than 1,000 Russian soldiers are operating in Ukraine. The crisis, which began in Crimea in late February, seems no closer to a conclusion. Meanwhile, the situation in Iraq remain … read more

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The week that was…

In the week ending 12th June, what stole the financial headlines

With relations between Ukraine and Russia already at breaking point, Ukraine’s prime minister ordered his government to prepare for a possible cut-off in natural gas supplies from Russia. This followed failed negotiations with Russian state-controlled Gazprom. Ukraine owes close to US$2bn in unpaid gas bills to Gazprom and the Russian giant has suggested it will demand pre-payment in the future. Meanwhile, three weeks after the US Justice Department accused China of hacking operation aimed at advancing its satellite and aerospace programmes, a private US report accused another Chinese military unit of similar infringements. Elsewhere, talk on Capitol Hill returned to US fiscal policy. In a speech in New York, US Treasury Secretary Jack Lew said US fiscal policy was now under control as he set out ambitious reform.

Headline Hotlist & World/ Asset Returns Source: The BNY Mellon Investment Strategy and Solutions Group (“ISSG”) as at 13/06/14. ISSG is part of The Bank of New York Mellon.

With relations between Ukraine and Russia already at breaking point, Ukraine’s prime minister ordered his government to prepare for a possible cut-off in natural gas supplies from Russia. This followed failed negotiations with Russian state-controlled Gazprom. Ukraine owes close to US$2bn in unpaid gas bills to Gazprom and the Russian giant has suggested it will demand pre-payment in the future. … read more

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The week that was…

In the week ending 6th June, what stole the financial headlines?

Global equity markets were boosted by further good news emanating from the US employment market. While the headline unemployment rate remained unchanged at 6.3%, US employment has returned to its pre-financial crisis level, with the economy recouping the 8.7 million jobs it lost during the recession. In Europe, Russian President Vladimir Putin came face to face with his Ukrainian equivalent, Petro Poroshenko, for the first time during the 70th anniversary commemoration of the D-Day landings. Meanwhile, Russians are more hostile towards the West than at any time since the break-up of the Soviet Union, according to the country’s leading independent pollster Levada-Centre. Finally, Chinese state media launched a publicity offensive against Google and other US technology companies as the Chinese administration ramped up its spat with the US over cyber espionage.

Headline Hotlist & World/ Asset Returns Source: The BNY Mellon Investment Strategy and Solutions Group (“ISSG”) as at 10/06/14. ISSG is part of The Bank of New York Mellon.

Global equity markets were boosted by further good news emanating from the US employment market. While the headline unemployment rate remained unchanged at 6.3%, US employment has returned to its pre-financial crisis level, with the economy recouping the 8.7 million jobs it lost during the recession. In Europe, Russian President Vladimir Putin came face to face with his Ukrainian equivalent, … read more

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